Friday, April 16, 2004

Flat Tax

The main problem with the idea of a flat tax -- quite apart from the diminishing marginal utility of money and the implications that has for progressivity -- is that this sort of argument completely ignores the payroll tax, which already takes a flat 15.3 percent out of the first $87,000 a person earns. The effect of a flat income tax and a flat payroll tax that applies only the first $87,000 is obvious: Regressivity. Assuming that the flax income tax rate is 14.7 percent, the guy who earns $40,000 pays 30% in total federal taxes. The guy who earns $4 million pays just barely over 14.7 percent total, because so much of his income isn't subject to the payroll tax at all.

Without payroll tax reform, in other words, a flat income tax means that the very rich will pay about half the total federal taxes as people who earn under $87,000. (The richer someone is, the more likely that he will pay a lower percentage of his total income in federal taxes, because his income will exceed $87,000 by a greater margin.)

Of course, that's without taking into account the effect of personal deductions for a family of four. With personal and other deductions in place, the $40,000 person might not pay any more tax than the rich person. Still, a move to make the income tax rates flat (or flatter) is almost sure to be regressive in its impact. I haven't heard of any valid reason for this outcome.